Rejection of books of account for non inclusion of freight and cartage in closing stock

Rejection of books of account for non inclusion of freight and cartage in the value of the closing stock had distorted the correct figure of profit. Therefore, the AO was within his right to reject the books of accounts u/s 145(3)

ABCAUS Case Law Citation:
ABCAUS 2547 (2018) 09 ITAT

Important Case Laws Cited/relied upon by the parties:
British Paint India Pvt. Ltd. Vs. CIT reported in 188 ITR 44

Rejection of books of account-non inclusion of freight cartage in closing stock 

The case of the appellant assessee was picked up for scrutiny assessment and the assessment u/s 143(3) of the Income Tax Act, 1961 (the Act) was framed.

During the assessment proceedings, the Assessing Officer (AO) noticed that the expenses related to cartage and freight were not included in the closing stock by the assessee. Therefore, the AO rejected the books of accounts by invoking the provision of section 145(3) of the Act.

As a result, the AO estimated the percentage of  net profit and made addition accordingly.

Against this addition, the assessee preferred an appeal before CIT(A) who after considering the submissions sustained the finding of rejection of books of accounts, however, adopted the average gross profit of the preceding years.

Before the Tribunal, the assessee challenged the rejection of books of accounts. It was argued that the AO was not justified in rejecting the books of accounts.

It was submitted that the AO ought to have accepted the book result declared by the assessee. Merely because the assessee could not inadvertently included the expenses related to freight and cartage in the closing stock, this should not have been sufficient for rejection of books of accounts.

It was further contended that the AO had not given any finding in respect of the other information declared by the assessee.

On the contrary, The Department opposed the submissions of the assessee and placing reliance on the judgment of Hon’ble Supreme Court submitted that the law is very clear. The AO is empowered to invoke provisions of section 145(3) of the Act in the event that on the basis of the accounts, the correct figure of the profit cannot be deduced.

The Tribunal observed that there is no dispute with regard to the fact that the AO would be within his power to reject books of accounts, if he is satisfied that the books of accounts placed before him do not give the correct figure of the profit.

The Tribunal found that in the instant case, admittedly, the assessee had not included expenses related to the cartage and freight in his books of accounts.

The Tribunal opined that non inclusion of the freight and cartage in the value of the closing stock had distorted the correct figure of profit. Therefore, the AO was justified to reject the books of accounts.

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